The Russian Crisis

The Russian Crisis 1998

Economic Report Other authors

In 1997, Russia’s economic growth was positive for the first time since the formation of the Russian Federation in 1991. Nevertheless, the country’s fixed exchange rate regime together with its fragile fiscal position appeared to be unsustainable when the international markets got affected by spillover effects of financial distress elsewhere in the world. In the course of 1998, the outbreak of a severe banking, currency and sovereign debt crisis could not be prevented. Author: Iris van de Wiel

Point of no return

August 13th, 1998

The Russian stock, bond and currency markets collapse as a result of fears for a ruble devaluation and a default on domestic debt. These fears had arisen during the previous months due to ongoing interest rate rises, capital outflows and the corresponding erosion of investor confidence in emerging markets. Annual yields on ruble‐ denominated bonds rise to more than 200%. Furthermore, the stock market is closed down for 35 minutes when stock prices fall sharply. Stocks have lost more than 75% of their value since the beginning of the year

August 17th, 1998

The government announces a set of emergency measures in order to prevent a further escalation of the crisis: • A significant devaluation of the ruble; the bounds of the corridor in which the ruble is allowed to fluctuate are widened from 5.27‐7.13 to 6.00‐9.50 ruble to the US Dollar; • A default on short‐term Treasury Bills known as GKOs, as well as longer‐dated ruble denominated bonds named OFZs; • A 90‐day moratorium on payments by commercial banks to foreign creditors.

September 2nd, 1998

The Russian Central Bank’s decides to remove the currency corridor and makes the ruble a freely floating currency. The ruble soon starts to depreciate sharply; in 3 weeks the currency loses two thirds of its value. The strong depreciation results in sharp price increases. Inflation rises to 27.6% in 1998 and 85.7% in 1999. As a result of food...